Monday, 2 May 2011

The market changes but it always stays the same

Yesterday, a reader posted the following:
Dear EL - Clearly you are on top of your game, but I cant help feeling you are getting caught up in the 'algo/HFT fear hype'. It's just a phase. They have just replaced your old job as a local as liquidity providers. Off floor traders always used to moan about (you)locals with their (your) unfair edge just like day and position traders moan about HFT today. Nothing new.
Real market direction (order flow) is still provided by the buy side contributing to real OI. Always has, always will. Nothing has changed which is where your years of experience come through. If a market is showing no buy side interest, just locals/HFT churning, I thought you would have looked at another market rather than change your range bars and scalp - lowering your cost/profit profile. Go trade Corn or Cattle. Loads a vol, little HFT - just buy side - paradise!!
Nick, I have no fear of HFT but embrace it. As I have written in the blog before, the liquidity that the HFTers provide is a bonus. Markets change and evolve and changing the size of my range bars is part of that evolution, although the speed of the evolution is something to take note of. I agree that nothing has basically changed but volatility is something that has always varied but now more than before due to the speed of the dissemination of the information.

I have been looking at Light Crude and I welcome your suggestion to look at the grains. Before financial futures were invented by Richard Sandor in 1982 ish, apart from the Gold and Silver boom triggered by the Hunt Brothers, the contract of choice was Beans, Soya Beans that is, the gold of the grains. In fact, it was Beans that Pete Steidlmayer traded mostly as a local before the T-Bonds became "it" and was the earlier contract that marketProfile was developed on before the Bonds.

I did trade Pork Bellies for a short time, but couldn't afford the losses. The commercials there controlled the market and LimitUp and LimitDown were very common days and getting caught on the wrong side was very unpleasant. 

Having said all that, the liquidity of the eminis is a very big plus point. Compare them to the DAX and you can see the difference. Being a very tiny part of the bid or offer at any one time is extremely important to me. Making smaller targets on higher volume is much easier than making bigger targets on smaller volume.

It's still "holiday volume" as Europe is busy dancing around the May pole of May Day.

1 comment:

  1. EL,

    I agree. With respect to futures, HFT is something to be welcomed. All of what I've read seems to say that HFT is about arbitrage, closing spreads, and profiting from correlations. To that end, high frequency traders are on both side of the market, filling the order book. That seems like a big plus for traders like us.

    That being said, it appears to me that HFT in equities pose a concern for traders like us.